Can I Borrow Extra On My Mortgage for Furniture?

When you’re buying a home, it can be tempting to use the extra money from your mortgage loan to buy furniture. After all, furnishing and decorating your new house is part of making it feel like home.

But before you start shopping around for couches or dining room sets with that extra cash in hand, there are some important things to consider. In this article we will discuss what factors should go into such an important decision as well as other options available if taking out additional funds isn’t right for you at this time.

Understanding Home Equity and Borrowing Against It

Home equity is the difference between the current market value of a property and the outstanding balance on any mortgages or liens secured by the property. In other words, it is the portion of the property that is owned outright by the homeowner.

To calculate home equity, you can subtract the amount owed on your mortgage and any other outstanding debts secured by the property, such as a home equity loan or line of credit, from the current market value of your home.

For example, if your home is worth $500,000 and you owe $300,000 on your mortgage, your home equity would be $200,000 ($500,000 – $300,000).

Home equity can increase over time as the property value appreciates or as the homeowner pays down the mortgage. It can also decrease if the property value depreciates or if the homeowner takes out additional loans against the property.

Borrowing More Money Will Increase Interest Payments Over Time

When homeowners borrow extra on their mortgage to finance furniture purchases or other non-essential expenses, they are essentially taking on additional debt and increasing their overall mortgage balance. This can result in higher interest payments over time, as the interest is typically calculated based on the outstanding balance of the mortgage.

For example, let’s say a homeowner has a $300,000 mortgage with a 25-year amortization period and a fixed interest rate of 3%. Their monthly mortgage payments would be $1,416, and over the course of the mortgage term, they would pay $124,832 in interest.

If the homeowner decides to borrow an additional $20,000 on their mortgage to purchase furniture, their new mortgage balance would be $320,000. Assuming the same interest rate and amortization period, their monthly mortgage payments would increase to $1,513, and they would pay a total of $133,312 in interest over the course of the mortgage term.

While borrowing extra on a mortgage may provide access to additional funds upfront, it’s important to remember that this decision can have long-term financial implications and result in higher interest payments over time. Homeowners should carefully consider the total cost of borrowing before making a decision.

What Factors Should You Consider Before Taking Out Additional Funds

Before taking out additional funds on your mortgage to finance furniture or other non-essential expenses, there are several factors you should consider:

• Interest rates. Determine whether the interest rate on your mortgage is lower or higher than other borrowing options, such as personal loans or credit cards. If other options have lower interest rates, it may be more cost-effective to borrow from them instead.

• Loan term. Consider the length of your mortgage term and how much it will be extended by the additional funds. A longer mortgage term may result in higher interest costs over time.

• Repayment plan. Understand the repayment plan for the additional funds and how it will impact your monthly budget. A longer repayment term may result in lower monthly payments but higher overall interest costs.

• Equity. Consider how much equity you have in your home and whether borrowing against it is a financially responsible decision. It’s important to ensure that you have sufficient equity in your home to support additional borrowing without putting your home at risk.

• Future plans. Consider your future plans and how they may impact your ability to repay the additional funds. If you plan to sell your home in the near future, borrowing against your equity may not be a wise decision.

By carefully evaluating these factors, you can determine whether borrowing additional funds on your mortgage is a financially responsible decision that aligns with your long-term goals and budget.

Tips for Responsible Borrowing

When deciding whether or not to borrow more than the amount required to cover closing costs and down payment expenses associated with purchasing a property, one must consider several factors first These include your current financial situation, how long you plan to stay in the residence, and potential PMI payments due upon refinancing.

Furthermore, any changes made now may affect future eligibility requirements, so it is best practice to always consult with professional advisors before making final decisions on these matters.

One thing to keep in mind is that most lenders allow borrowers to borrow up to 80% of their home’s value without paying Private Mortgage Insurance (PMI). However, depending on individual circumstances, even slightly exceeding the 20% threshold may require the borrower to incur additional expenses, significantly increasing the overall cost of owning/maintaining property over time.

Conclusion

In conclusion, borrowing additional funds on a mortgage to finance furniture or other non-essential expenses can result in higher interest payments over time. Before making a decision, it’s important to carefully evaluate factors such as interest rates, loan terms, repayment plans, equity, and future plans.

By following the tips for responsible borrowing, you can make sure you’re making informed decisions that align with your long-term financial goals and budget. Remember, borrowing responsibly can help you avoid financial stress and achieve financial stability in the long run.

FAQs

Q: What are other options for financing furniture besides using a home loan?

A:  Other options for financing furniture include personal loans, credit cards, store financing, and home equity lines of credit (HELOCs). Personal loans and credit cards may have higher interest rates than home loans, but they offer more flexibility in terms of repayment periods and loan amounts. Store financing options may include deferred interest or installment loans. HELOCs may offer lower interest rates than personal loans or credit cards, but they also put your home at risk if you can’t make payments.

Q: How much do most people spend on average when purchasing new homes and their associated costs? 

A: The cost of purchasing a new home and associated costs can vary greatly depending on factors such as location, size, and condition of the home. In the United States, the median home price as of January 2023 is around $359,000, according to the National Association of Realtors. However, this figure can be significantly higher in certain areas. 

Q: Is there any way avoid paying private mortgage insurance if takeout large sum cash from existing agreement?

A: It depends on the specifics of your mortgage agreement and lender requirements. Generally, if you take out a large sum of cash from your existing mortgage, your loan-to-value (LTV) ratio may increase, which could trigger the requirement for private mortgage insurance (PMI) if your LTV exceeds 80%. However, some lenders may offer options to avoid PMI, such as requiring a higher down payment or accepting collateral in lieu of PMI. You may also be able to refinance your mortgage to eliminate PMI if you have sufficient equity in your home.